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Thursday, April 18, 2024
HomeFinance NewsGrowing Credit Card Delinquencies Pose No Immediate Threat to Banks.

Growing Credit Card Delinquencies Pose No Immediate Threat to Banks.

The delinquency rate for credit card payments has increased, raising concerns for banks and lenders. In the second quarter, the delinquency rate stood at 2.8%, just slightly higher than the peak of the previous credit cycle in 2019. However, it is considerably lower than the peak during the global financial crisis in 2009. Delinquencies hit a record low of 1.6% in the third quarter of 2021 due to stimulus cash, but have since almost doubled as excess savings dried up and inflation eroded household nest eggs. While the delinquency rate itself is not worrisome, the speed at which it is rising highlights concerns about the US economy.

There are some factors that differentiate this delinquency cycle from previous ones. Before the financial crisis, delinquency rates remained around 4% to 5% for nearly two decades. However, since then, banks have adopted stricter underwriting standards and face more stringent rules on building reserves for expected losses. Additionally, the Federal Reserve’s interest rate hikes have caused credit card interest rates to increase by 43% over the past 18 months, the fastest increase on record. While this rise in interest rates can offset losses for banks, consumers who thought they could handle their credit card balances may now be struggling.

The impact of delinquencies on banks will be better understood next month when the sector starts reporting earnings. For now, the rising delinquency rates serve as a warning sign for the US economy, highlighting the challenges faced by consumers and the potential pressure on banks and lenders.

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